Why Monopoly Is The Perfect Market Model For Startups

 

A quick thought on the behavioral traits of humans and you’ll realise that we’re created to follow the bandwagon systems of life. An average person wants to belong to a clique and wants to be identified with the ruling class. An average person would not want to nurse different ideologies because he wouldn’t want to be considered different. It kind of makes sense to avoid social isolation, but business has a different perspective to that.

In a market chain, there are two parties at the extremes: Producer and Consumer. Retailer, wholesaler, distributor and the rest falls within these extremes. This means we have Producer, Consumer and Others. I’m not undermining the relevance of others, I just want to remove them from the picture while we focus on the remaining two.

The business perspectives of consumers differs so much from that of producers. While consumers seek to save more money, producers are heartbent at making as much money as they can off the consumers.

While I was growing up as a kid in the heart of Lagos, I remember the other kids in my neighbourhood were always on the lookout for commercial promos that companies like Nestlé, Coca-cola and 7-up run. When such starts, everyone gets excited and sought to participate in order to go home with prizes.

What we never knew then was that the companies made more money from us than we could imagine during the course of those promos. At one time, noodles giants, Indomie offered to give one pack of noodles in exchange for 10 used packs. It sounded like a good bargain, and sheepishly we pressurized our parents to buy and cook more indomie noodles, so that we could get one noodles pack in exchange for 10 used ones.

A lot of us actually identified how foolish we were then, but the influence of the crowd was stronger than our wisdom, thus we consumed more noodles at the reward of one. It was really difficult to break out of the spell indomie casted on us.

This instance has played out in diverse styles in so many different scenarios. Producers just want profit. Businesses themselves are created for two reasons: to solve problems and to make profit. For a startup the scenario is not different either.

As a startup owner, you should be in solving your users problems and making the best profit doing so without exploitations. The possibilities of this is determined largely by the market model you find yourself in.

Types Of Market Models

Basic economics taught us that there are two four types of market models:

  • Pure Competition
  • Oligopoly
  • Monopolistic Competition
  • Monopoly

Although the focus is on the two extremes: pure competition and monopoly, a concise explanation of all four models can be obtained here.

1. Pure Competition

Paypal’s co-founder, Peter Thiel once said that “competition is for losers.” Those four words captured so much attention because it seems to kick against the laws of market fairness. But like I insinuated earlier, an entrepreneur’s approach to market metrics differs from that of consumers or users.

A pure competitive market is one that has several players in it and prices are controlled solely by the forces of demand and supply. If you’re starting a startup in a market that has several competitors you’re definitely going to ushered into a pure competition.

Users always love the idea of pure competition because it gives them the power of choice, but it is not very healthy for the survival of startups. For instance, imagine a large market worth $100billion with over 2000 competitors, in spite of the fact that the market share is high, it’ll be difficult to make tangible progress in such a market because lots of people are competing for the same figures.

The problem with humans is that we’ve been completely immersed in the pool of bandwagon ideologies. Everyone wants to be everywhere there are opportunities and only few people are interested in creating new opportunities.

In Nigeria for instance, there is a frenzy people have for studying courses they consider lucrative or viable. About 15,000 lawyers graduates from Nigerian universities annually and 6x of that figure applies to study law every year. At the end of the day, the percentage that ends up practicing are not up to 10%. Other important courses have been abandoned because they don’t seem to be viable.

People so much have a craze for whatever the public upholds. This ideology is so much in businesses. When a new line of business starts trending, entrepreneurs will dive into it in a bid to fight their way to the top. Zero ingenuity! If there are 20 contestants for a trophy and one clings to it, it means the remaining 19 are losers.

In spite of the fact that continuous practise makes them better at their game, it doesn’t neglect the fact that they are termed losers.

Does this therefore mean that one should completely avoid a competitive market? No.

On the contrary, it means that it’s easier to gain more market share in a small market that is monopolistic than in a large one that is competitive. The earlier people starts seeing opportunities in isolation, the better progress they make as entrepreneurs.

2. Monopoly

One more thing that basic economics taught us is to hate monopoly because it kills the market and exploits the users. But as an entrepreneur, it’s a different ball game altogether. Competition reduces your startup’s chances of survival while monopoly gives you better reward for your efforts.

When starting a startup, one must give proper thoughts to the level of influence he can amass in a market. A monopolistic market is one that has only one player. IBM was initially a monopoly in the computer market. Same for Google as a search engine company. Their annual revenue has always been in billions of dollars.

Being a monopoly doesn’t entail getting a totally new idea that the world is yet to know. Rather, it means the idea or innovation should be basically fresh in our immediate market which can be a small community, state or country. Autocratic leadership in African countries like Zimbabwe, Libya and Cameroun has metaphorically shown us how difficult it can be to displace a monopolist.

Even if the market is small, you can be rest assured that you can take up to 70% or more of the market shares, and your net revenue will be higher than that of an average startup in a competitive market. Such a market system will give you the opportunity to experiment a lot without losing users. It gives perfect reward for your innovations.

The major downside to monopoly is the chances of exploitation on the users by the monopolist.

Questions To Answer Before Starting A Monopolistic Startup

  • How do you intend to remain relevant in the market over the years?
    No monopoly lasts forever. Competition must eventually set in. What business strategy have you drafted out for the next decade to ensure a potential competitor doesn’t drive you out of business by improving on the ideas of your startup. You certainly need to see it coming and should have models of such improvements under construction before someone else thinks of it.

  • Is your company going to be the last breakthrough?
    Is your startup the future people are dreaming of or is it just a step to the future? Being the last breakthrough means no one can perfectly oust you out of your position even in the face of competition because, you’ve offered (and offering) all that can possibly exist in that market.

  • What are your diversification plans?
    Is that the only market you plan to remain in forever? Are you going to diversify into other markets as well. Do you see a big picture in other industries? You certainly don’t want to remain a local champion forever.

Please leave a comment.